Bank Regulation and Debt Overhang

Tahir Andrabi and Andrea Ripa di Meana

Journal of Money, Credit and Banking, 1994, vol. 26, issue 3, 460-78

Abstract: The paper explains why banking regulations are crucial to the unfolding of the current international debt crisis. The interplay of deposit insurance and capital adequacy requirements may create strong disincentives against offering relief to debtor countries with solvency problems, in spite of the fact that granting relief would improve the worth of the claims held by creditor banks. Furthermore, it is shown that the negotiating stance of individual banks is not related to their exposure to troubled loans in any simple way. Whether highly exposed banks are tougher than those with limited exposure is also generally dependent on the features of the regulatory environment. Copyright 1994 by Ohio State University Press.

Date: 1994
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